If you’re trying to understand the intricacies of international banking, you might be wondering “how does a bank guarantee work?”
In most cases, this comes up when a business is engaging in cross-border transactions with a new supplier or is dealing with very large transactions.
In this article, we’ll take a look at the different variables that impact bank guarantees and share important considerations you should think through before requesting one from your bank.
We’ll also discuss the type of accounts that can access guarantees, from an onshore corporate account to a quasi-anonymous bank account.
Feel free to jump ahead to the areas most relevant to you by using the table of contents below.
Table of Contents
Bank Guarantees 101
As mentioned, bank guarantees are typically required when a business is engaging in cross-border transactions.
Guarantees from the bank provide the other party in the transactions (usually a supplier or client) with a guarantee that the bank’s client will meet their obligations.
How Does a Bank Guarantee Work?
If the bank’s client fails to meet their obligations, the bank that issued the guarantee will be liable to pay the other party (e.g. supplier or customer) the guaranteed amount.
Also, it’s important to note that the obligations covered by a bank guarantee can either be financial (e.g. payment) or based on a specific deliverable (e.g. service or product).
Not surprisingly, in order to issue a bank guarantee, most banks will require a long-standing relationship with the customer.
Alternatively, in the case of a new banking relationship, the bank may require the customer to maintain a specific balance as collateral.
Again, bank guarantees are typically issued in support of large cross-border transactions. These cross-border transactions typically involve import and export agreements, major engineering or construction projects, or large transactions between two parties that have not worked together before.
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Frequently Asked Questions
Below are two of the most common questions that we receive from people looking to open accounts in order to access bank guarantees. If you have further questions you would like answered, don’t hesitate to get in touch with us directly.
Do Bank Guarantees Differ From Bank to Bank?
Yes, bank guarantees differ from bank to bank. In fact, bank guarantees also differ from customer to customer. This is because a bank guarantee is a credit product, so banks need to assess the creditworthiness of each customer on a case-by-case basis. Additionally, different banks will have varying appetites to issue bank guarantees for different industries, jurisdictions, and financial levels.
Are There Different Bank Guarantee Types?
There are many different types of bank guarantees, including a guarantee of payment, a guarantee of execution, a tender guarantee, a guarantee of warranty, a guarantee of advanced payment return, a guarantee of credit return, and more. Each type of bank guarantee applies to a different scenario and offers different pros and cons to the parties involved.
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